In November 2007, Petrobras, Brazil’s state-run energy company, announced it had made the largest ever deep-water oil and gas discovery off the country’s southern coast. By 2009, with the economy growing at 6 per cent, Brazil was being hailed as the “next oil giant.” Later that year, the 2016 Olympic Games was awarded to Rio de Janeiro.

Today, Brazil is facing a political and economic crisis. Petrobras, South America’s largest company, is the centre of a huge corruption scandal in which officials are accused of taking kickbacks from the construction industry. Meanwhile, the economy is enduring a sustained contraction that is unparalleled since records began in 1901. Brazil, the B in BRICS, has gone from boom to basket-case in less than a decade.

The current President, Dilma Rousseff, is a former minister of energy who served as chair of Petrobras from 2003 to 2010. Though under threat of impeachment on a different issue and facing calls to resign, she has not been personally implicated in the scandal. But the judicial investigations into the company have engulfed other members of Brazil’s elite, including a serving senator and one of the country’s best-known financiers.

The latest shocking twist is the criminal investigation launched into former President Lula, or Luiz Inacio Lula da Silva. The hugely popular Lula, Rousseff’s predecessor and mentor, was head of the Workers’ Party and president from 2003 to 2011. Under his leadership, Brazil introduced the Bolsa Familia, one of the world’s largest conditional cash transfer programmes, which now covers over a quarter of the population. Poverty rates, infant mortality and measures of income inequality all declined. Yet these achievements now could be tainted by the Petrobras scandal.

All this has damaged the hope that Brazil might break free from a volatile political past that includes two decades of military rule until the mid-1980s and the 1992 impeachment of President Fernando Coller on corruption charges. On the other hand, it is to the country’s credit that its institutions are capable of uncovering and prosecuting a major corruption scandal. There may be cause for optimism that the political blockages to macroeconomic surgery might eventually be broken down too, though it is early days for such a judgement.

In the meantime, news of the investigation into Lula led to an immediate rise in Brazil’s beleaguered stock and currency markets, perhaps because of the expectation it might lead to Rousseff’s resignation. Yet Brazil’s economic future remains dark. The economy shrank by 3.8 per cent in 2015, and is expected to contract by 3-4 per cent in 2016.

Moreover, the country has a severe fiscal problem. The public sector deficit has grown from 2 per cent of GDP in 2010 to around 10 per cent of GDP, roughly three-quarters of which comprise interest payments. Interest rates are now around 14 per cent and inflation is running at 10.7 per cent. Well-designed fiscal restructuring is necessary, but Rousseff’s uncertain grip on power has led to political paralysis.

Furthermore, pensions amount to about 12 per cent of GDP—a larger share than in Japan—while being about as generous, or more so, as anywhere in Europe. The pensionable age is 50 for women and 55 for men; labour laws are highly restrictive; and the OECD ranks the country’s productivity as 37th out the 41 countries covered.

On top of these weaknesses, Brazil runs an eternal deficit of about 2 per cent of GDP. That figure is half what it was in 2014, but other countries that have endured comparable downturns in growth and demand have tended to surge into surplus. Improvement has been sluggish despite the weakness in demand, highlighted for example by the fall in auto sales from 350,000 in 2013 to about 175,000 last year. This suggests that Brazil’s sticky external deficit is more about competitiveness despite the fall in the Real, which has dropped from BRL2 to the US dollar in 2013 to about BRL 3.75 now.

It is small wonder that the rating agencies Moodys, Standard & Poor’s and Fitch have all cut Brazil’s credit to “below investment grade,” more commonly known as junk. This downgrade means that investors whose mandates require them to hold only investment-grade securities are forced to sell and local issuers are squeezed out. In 2015, Brazilian entities issued 80 per cent less in global debt markets than in 2014, and Brazil’s share of Latin American global debt offerings dropped from a third to 9 per cent.

Looking back, it should have been clear even to Brazil’s cheerleaders that the boom under Lula and in the early years of Rousseff’s tenure was built on shaky foundations. The China-centric surge in industrial and agricultural commodity prices, and the rise in the price of oil brought exceptionally good fortune to Brazil. On top of that, the government presided over a marked expansion in credit creation that added momentum to the boom. The share of credit in GDP rose from 35 per cent when Lula came to power to 60 per cent just before he left, and subsequently to 80 per cent.

How can Brazil extricate itself from this quagmire? The commodity cycle is a spent force, the debt/leverage cycle is at an end, and the country is left with a contracting economy and the need for a major fiscal overhaul. A fresh political start would help. Lower interest rates are essential but first inflation must be brought down and that requires a lengthy period of currency stability. Quite how the country’s financial crises will be resolved, given the state of its politics, is unclear. If all else fails, Brazil may have no option but to restructure under the umbrella of the IMF.

In any event, this exposes the poverty of “new era” thinking, which proposes that the rules have changed somehow. Brazil is a more modern and prosperous place than it was in 1950 or 1900. But if we look at its income per head relative to the US, it now stands at about 24 per cent, the same as it was in the 1950s. Brazil is in the so-called “middle-income trap,” where a country achieves a certain level but then gets stuck. There are few reasons to think the other members of the BRICS will fare much better.

Now read: World growth is faltering—the G20 must start practising what it preaches

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